Want companies that have higher long-term job stickiness, survival rates and sales? If so, read this

June 24, 2021
By: Mark Skinner

Regardless of the approach used, the goal of every economic development program in the country is to create economic opportunity within a specific geographic area. If more local, state and federal policy makers and practitioners were aware that empirical research has revealed certain types of companies were 235 percent better than others at maintaining long-term job “stickiness,” would we shift more resources and priorities in their direction?  Would knowing these same companies also were shown to be more profitable, had higher sales, and had greater survival rates than others help persuade skeptics? Should more companies with these business models be part of your region’s portfolio of innovation-based firms?

Employee ownership models — such as worker cooperatives (co-ops), employee stock ownership plans (ESOPs) and employee ownership trusts (EOTs) — represent a very small, but growing share of all U.S. firms. The underlying premise of such models is to broaden the benefits of success and risks of failure to more of the individuals actually involved in a firm’s productive output instead of just a small group of owners or shareholders.  Because of the broader and more personal buy-in workers have to the company’s performance, the theory holds, the company is more likely to behave in ways that will support its long-term growth, stability and profitability. 

A May 2020 meta-study of past empirical research on employee ownership, compiled by Project Equity, bears this out. Studies revealed profit margins of employee-owned companies were found to be nearly 10 percent higher than the average private firm, ESOPs recovered from the Great Recession faster than the overall economy, employee turnover was lower and wages were 33 percent higher, and co-ops failed less by 29 percent than conventional firms and were 25 percent more likely to have lasted more than 25 years than all other U.S. small businesses collectively.

Many innovation finance programs within the tech-based economic development community will most likely see immediate conflicts to working with co-ops and trusts through conventional seed, venture investment instruments. Fast growth in the shortest time period possible with an eye always on the exit (through a merger, acquisition or IPO) is a great way to maximize the traditional key performance indicators for a venture fund.  Critics may argue other economic development goals — like the longer term stats mentioned above — might suffer as a result. Alternate financial terms or exit opportunities may be required to help grow and keep innovation-based firms in local economies over the long term.

It turns out conventional finance tools offered through federal agencies like the SBA and Treasury also present barriers to participation by employee-owned businesses. As a result, a significant portion of the nearly 100 comments received by the Treasury Department for the upcoming State Small Business Credit Initiative (SSBCI) were associated with the challenges faced by ESOPs, EOTs and co-ops, and the resulting negative impact on the overall performance potential of SSBCI toward its congressionally-mandated objective of building broader inclusion in the economy.

To help overcome these challenges, Project Equity and the ESOP Association launched an awareness initiative this week to increase federal and state policymaker awareness of the potential contributions greater adoption of employee-owned business models could make in broadening opportunity, particularly toward addressing the growing issue of succession plan scarcity for aging owners of small businesses in rural and small town America. Infographics for each state have been developed as part of the campaign.

esops, small business, innovation